Practice Questions Lecture 4

Practice Questions Lecture 4 - FINA 5512 VALUATION Lecture...

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FINA 5512 VALUATION Lecture 4 Economic evaluation of mergers and real options in M&A Q1: AC is considering a takeover of TT Inc. AC has 10 million shares outstanding, which sell for $40 each. TT has 5 million shares outstanding which sell for $20 each. If the merger gains are estimated at $20 million, what is the highest price per share that AC should be willing to pay to TT shareholders? What is AC’s NPV if it pays the maximum price? Q2. VS is contemplating the acquisition of PSS. The values of the two companies as separate entities are $20 million and $10 million respectively. VS estimates that by combining the two companies, it will reduce marketing and administrative cost by $500,000 per year in perpetuity. VS is willing to pay $14 million cash for PSS. Its opportunity cost of capital is 10%. a) What is the gain from the merger? b) What is the cost of the cash offer? c) What is the NPV of the acquisition under the cash offer?
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